House price growth set to taper in year ahead

The Reserve Bank of Australia looks likely to keep official interest rates unchanged for the best part of the next 12 months even though house prices posted the strongest financial year gain in four years.

Growth is expected to remain “a little below trend" over the coming year, the central bank said as it pointed to the fact the end of the resources boom was starting to bite while the strong dollar was hampering the transition to other drivers of growth.

At the same time, there are small signs of improvement in the outlook, it said, including a rise in business borrowing and home construction ­gathering strength.

The dollar jumped to about US94.57¢ from US94.18 before the decision was announced on Tuesday.

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The rise may have been driven by a subtle change in language in the ­post-board meeting statement, which said the dollar was “offering less assistance than it might" to help the economy.

Economists said the remark was a gentle attempt to “jawbone" the ­currency lower.

However, if that was the central bank’s intention, it appears to have backfired in the immediate aftermath given the dollar’s rise.

Reserve Bank governor
Glenn Stevens
reiterated the board has concluded the most “prudent course is likely to be a period of stability in interest rates". He has repeated this phrase after every meeting since February.

HSBC Australia chief economist Paul Bloxham said the Reserve Bank wasn’t likely to raise the cash rate until early next year.

“They do seem concerned about the high level of the currency . . . there is, however, little that we think the RBA can do about it," he said.

“Cutting rates further would risk over-inflating the housing market."

Figures published on Tuesday by RP Data showed house prices jumped just over 10 per cent in 2013-14, bolstered by strong results in Sydney and Melbourne.

While the gains were strong over the financial year, in recent months capital gains have begun to taper and rental yields soften.

Month-on-month, June results showed a small bounce-back after growth fell across the capital cities in May.

But quarterly data showed a drop across the capitals, including a 2.4 per cent decline in Melbourne. Sydney, Brisbane and Perth recorded small gains about 1 per cent and under in the three months ended June 30.

RP Data research director Tim ­Lawless said the last time a quarterly fall was recorded across the capital cities was last May.

“The recent reduction in capital gains is likely a correction from the strong market conditions reported over the first quarter of the year," he said.

Sydney’s median values remain well ahead of the other capitals. House prices rose 1.2 per cent to a $800,000 median and a 3.9 per cent rise in unit values in June was reflected in a $586,000 median.

Melbourne values slipped 2.4 per cent for the quarter although some ground was regained in June. A 2.7 per cent rise in unit values took the median to $468,000. Houses rose 1.7 per cent.

Mr Lawless said there was room for more capital gains in Brisbane, where values rose 0.8 per cent in the quarter and 1.6 per cent for the month to a $490,000 median and units were down 0.8 per cent for the month to $370,000.